Thursday, 31 March 2016

When I write about what I call mediamacro,
which includes bad reporting of macroeconomic issues by the media, I
often receive comments suggesting that the importance of the media’s
bias against Labour is exaggerated, and anyway there is nothing that
can be done about it. Now of course the print media is biased against
Labour, and what evidence we have also suggested
a BBC bias against Labour under Miliband. But most of the time when I
complain about BBC and other non-partisan media reporting on
macroeconomic issues, it is not a bias against Labour that concerns
me, but a bias against the facts.

Take the proposition that austerity was required because Labour
borrowed too much. That proposition is simply false. The increase in
the government’s deficit occurred in 2008/9 and 2009/10 as a result
of the recession caused by the global financial crisis. As I noted
most recently here,
the Labour government before the recession was clearly not profligate
in the normal meaning of that term. So when Conservatives constantly
talk about having to clear up the mess Labour left, and this goes
unchallenged in the media, that has the effect of legitimising a
false statement.

What we have in this case is a variation on what they call in the US
a ‘shape of the earth: views differ’ style of reporting. In that
case one side claims the earth is flat and the other side says it is
round, and the media in an effort not to appear politically biased
report it as a disputed fact. If you think that example is too wild,
think about climate change, or maybe wait until the US election where
Trump is one of the two candidates. Was Obama a US citizen: views
differ.

What we get as a result is a bias against the facts. In the case of
Labour and the deficit, because Labour chose fatefully not to
challenge the Conservatives on this, the media takes this as
confirmation that it must be true rather than checking the facts
themselves, or shy away from presenting the facts because that would
be seen as ‘too political’. Myth then becomes a fact that even
some
Labour MPs start believing, and when someone actually stands up for
the facts they are assumed to be dishonest or a slightly mad
professor. So the BBC fails in its mission,
which is to inform and educate as well as entertain.

I was going to advertise my talk in Bristol at this point, which will also explain how this failure played a major role in the 2015 election, but I see that it is now sold out. If there is sufficient demand I will write up what I say and publish it here.

Tuesday, 29 March 2016

Diane Coyle, in reviewingRowan Moore’sbookSlow Burn City: London in the 21st Century,
focuses on the idea that forever rising house prices could gradually
kill off what is now a vibrant city. As housing gets steadily more
expensive, getting people to work there will get more and more
difficult. In the meantime, young people who can afford to buy get
more
and more into debt. I wonder whether soon mortgage providers will
become more interested in the wealth of borrowers parents than in the
borrower’s own earning capacity. (This is not just a London problem: see here about New York for example.)

The reason for this that everyone focuses on, understandably, is
stagnant housing supply. However, housing can also be seen
as an asset. Just as low real interest rates boost the stock market
because a given stream of expected future dividends looks more
attractive, much the same is true of housing (where dividends become
rents). Stock prices can rise because expected future profitability
increases, but they can also rise because expected real interest
rates fall. With housing increasingly used as an asset for the
wealthy, or even as a way of saving for retirement, house prices will
behave in a similar way. A shortage of housing supply relative to demand
raises
rents, but even if rents stayed the same falling expected real interest
rates raise house prices because those rents become more valuable
compared to the falling returns from alternative forms of wealth.

That is why a good part of the house price problem comes from the
macroeconomy: not just current low real interest rates, but also low expected rates
(secular stagnation). The idea that house prices are tied
down by the ability of first time buyers to borrow (and therefore to
real wages or productivity, modified by changes in the risks lenders
were willing to take) seems appropriate to a world where the
importance of the very wealthy was declining, and most people could
imagine owning their own home. We now seem to be moving to a more
traditional world (remember Piketty) where wealth is more dominant,
and with low interest rates that may also be a world where renting
rather than home ownership becomes the norm for those who are not
wealthy and whose parents are not wealthy.

There may be factors behind secular stagnation (low long term real
interest rates) that we can do little about, but there are things we
can do right now that will raise interest rates, and thereby tend to
lower house prices. The most important of those is to stop taking
demand out of the economy through continuing fiscal consolidation
(aka austerity). This boost to demand that comes from ending fiscal
consolidation will allow central banks to raise interest rates more
quickly. While central banks may only be able to influence real
interest rates in the short term, because so much uncertainty exists
about what this long term involves the short term may have a powerful
influence on more distant expectations.

We can also have some positive influence on the longer term by
increasing public investment, including forms of public spending
(that may not be classified as investment) that encourage private
investment. It should also include building houses where (or of a kind) the private sector
will not build. That will have beneficial effects in terms of raising
real interest rates in both the short and longer term.

Ever rising house prices lead to unprecedented high levels of private
debt, and also destroy the dream of many young people to own their
own home. One answer is to build more houses, but another is to run
better macroeconomic policies. That house prices continue to rise
during a period of fiscal austerity is not an anachronism. It is not
a bug but a feature of an age of austerity.

Monday, 28 March 2016

When I say that textbook macro, and the macro used by most mainstream
macroeconomists, says austerity of the kind implemented in 2010 was a
big mistake, I am sometimes told ‘but that was not what economists
said at the time’. The names of one or two well known economists
are often mentioned, or the letter from 20 economists in the Sunday
Times in February 2010.

What is often forgotten is that this letter sparked an immediate
response. Over 60 economists wrote
in one or other of two letters published in the Financial Times that
now was not the time for strong fiscal consolidation. The recovery
had to be properly established first. Given that these responses were
put together in haste (which probably explains why I did not get the
chance to sign either), but still managed to attract over three times
as many signatures as the original, I would suggest that shows pretty
clearly that a clear majority of UK macroeconomists at the time
followed current and textbook analysis on austerity.

Even some of the original 20 later admitted
they had made a misjudgement. So why is this letter remembered, but
the responses to it are not - particularly as the responders were
clearly proved right by subsequent events? Using OBR figures I
calculated
that Osborne’s austerity has cost each UK household at least
£4,000, and probably
more. This number has never been seriously challenged, but I also
think it is not widely known. When it comes to austerity, the problem
is not and never has been mainstream macro theory or mainstream macroeconomists.

Saturday, 26 March 2016

Although this discussion is about the UK, the macroeconomic issues
involved apply equally elsewhere.

Most of the media discussion of Labour’s new fiscal rule presented
before the budget focused on the commitment to balance the current
budget. The media did this because ‘the hook’’ was the
similarity between this aspect of the rule and the rules proposed by
Brown or Balls. As I noted
at the time, no one in the media seemed to want to compare this goal
to the Chancellor’s overall surplus objective, which remains rather
extraordinary.

In some ways this element is the least interesting part of the rule.
Two other key parts are that current balance is a rolling five year
target, and the knockout if interest rates hit their zero lower bound
(ZLB). Both are more difficult to explain quickly in a mediamacro
world where the deficit is considered all important, although at
least with the rolling 5 year target a quick response is that the
coalition government adopted exactly that form of target. If they had
adopted the less flexible target of current balance by 2015, the
economy would have been even more screwed by austerity than it
actually was.

The really new feature of the rule is the knock out. (This was
described as a ‘loophole’ by one political reporter: mediamacro
again.) The rule is deliberately suspended to allow for fiscal
stimulus when interest rates hit their ZLB. How much stimulus?
Whatever it takes to get interest rates to rise above the ZLB. In
PortesandWren-Lewis
we suggest the Bank of England are the obvious people to advise on
this (the size of stimulus, not its form in terms of spending
increases or tax cuts). The focus of fiscal policy switches from
deficit control to stabilising demand, but only because monetary
policy can no longer do that job effectively.

If such a rule had been in operation during the Great Recession, we
would have seen a continuation of the fiscal stimulus we saw in 2009
into later years. That would have meant, for sure, that government
debt would have risen by more than it did, but it would also have
meant, for sure, that output would have recovered more quickly. What
would have happened to the debt to GDP ratio we cannot know for sure,
but the important point is that this does not matter.

It is this last point which is the most difficult to convince people
about in the mediamacro world. In this (imaginary) world, we have to
worry about the deficit because if we do not there might be a
financial panic, with interest rates on government debt rising and
perhaps even an inability to sell that debt. The best response to
this concern is it would not matter even if it happened, because the
Bank of England would buy the debt and keep interest rates on that
debt down. Of course the market panic scenario will not happen
anyway, because there is zero chance that the government will
default, but trying to convince people that the financial markets
will behave rationally after the global crisis is hard.

Many non-economists think creating money to cover the deficit sounds
outlandish, until you point out it is already happening with QE. The
potential size of the QE programme is unlimited. The whole point of
QE is to keep long term interest rates, like the interest rate on
government debt, low. QE happens when short interest rates are at
their ZLB. That it why, when rates are at the ZLB, fiscal policy can
focus on stimulating the economy. [1]

There are some who think that any kind of fiscal rule represents
appeasement of the austerity position. As I discussed in my post
on MMT, I do not think that is very good economics, particularly for
a party (like Labour) that is committed to maintaining an independent
central bank that uses monetary policy to stabilise demand. In that
regime, when you are not at the ZLB, deficit bias is a potential
problem. I think intergenerational fairness is important, and we
shouldn’t ignore it just because the argument is misused to support
austerity. I am reminded of this every time I look at Norway, and
recall how Mrs. Thatcher effectively used oil revenues to cut taxes
rather than build up a sovereign wealth fund. There is a certain
irony that George Osborne’s current policy of going for surplus,
while totally wrong for today, would have been the right policy in
the late 80s and 1990s.

Ellie Mae O'Hagan recalls
how many on the left (in my recollection all shades of the left)
argued that when austerity started to bite there would be a popular
revolt against the policy. That did not happen, in part because of
mediamacro, but also because there was not a clear alternative to
unite behind. Labour tried to have it both ways, expressing worries
about what austerity was doing but also agreeing that the deficit was
a current concern. In Labour’s new fiscal rule we have a policy
that sets out clearly how we should deal with any new crisis, and
also how we should have dealt with the last one. It is a policy the
left should unite behind, because overcoming mediamacro’s obsession
with deficits will not be easy.

[1] You can only do this if the government controls the currency its
debt is issued in. When that does not happen, as many developing
countries have found to their cost, you do have to worry about the
bond markets. That was exactly the problem that led to the Eurozone
crisis, until the ECB came up with OMT.

A more elaborate
argument for countries that do borrow in their own currencies is that
a market panic over government debt would be accompanied by a run on
the currency. Paul Krugman tackles
this, but following discussions with the FTs Martin Sandbu I do plan
to discuss this issue further at some point.

Thursday, 24 March 2016

The answer in principle is of course not. In practice, not so clear.
This is something I talked
about back in October 2013, and there are no signs that things are
getting better. Alex Marsh makes
the same point in the context of the latest budget. This antagonism
to ‘unhelpful’ evidence is out there in plain sight for all to
see in the UK government’s current attempt to deny academics in
receipt of public funding the ability to talk about the policy
implications of their work. I talked
about this in terms of the misuse of the term ‘public money’ a
few weeks ago, but it is also a pretty direct attempt to suppress
unhelpful advice. (Note that ministers have the power under this
proposed legislation to revoke this ban in individual cases,
presumably when evidence is ‘helpful’ - to them.)

Of course we are not talking about a hostility to evidence based
policy by everyone on the right on all occasions. In a THE article
by Ben Goldacre, where he also highlights the dangers of the
government’s proposed legislation, he details the extent to
which he is talking to ministers about evidence based policy. But
that interest does not seem to extend to big macro decisions. I was
reminded in reading this
about what I regard
as a triumph of evidence based policy making in my own area: the UK
Treasury analysis of Euro entry in 2003. (Disclaimer: my little
contribution is the fourth one down in the picture of the reports.)
Why didn’t this government do something similar for both the
Scottish referendum and the EU referendum?

Everytime I mention the 2003 exercise someone responds that it was
just a smokescreen for a power play between Brown and Blair. I think
this is an overly cynical view, a view that evidence never changes
anyone’s mind. Ramsden’s own view is that the civil service,
using the evidence, “ultimately persuaded both the Chancellor and
in particular the Prime Minister that it wasn't right to join."
It was also the right decision. With both recent referendums we have
seen proponents of change putting out documents suggesting that
change will not be economically damaging, when most evidence shows
pretty clearly that it will be. With the EU referendum in particular,
would it not have been better if the government had asked the
Treasury to do a similar exercise to 2003, using outside experts
where appropriate to provide or validate the technical analysis?

Ben Goldacre’s piece reminded me of my own recent place on John
McDonnell’s Economic Advisory Council (EAC). From Ben’s tweets I
knew that he was not the greatest fan of this government, and in
particular their current treatment of junior doctors, so I asked him
whether he had received any negative comments from doctors or others
about him giving advice to the government. I was not surprised to
hear he had not. Who could object to him taking the opportunity to
argue for better use of data and trials in medicine and elsewhere
with people who just might do something about it?

It is a shame that some people did not take the same view when I
agreed
to be on the EAC. I would lose credibility as a macroeconomist, I was
told.
When McDonnell did his U-turn about supporting the fiscal charter,
some suggested this reflected badly on me, even though he had turned
in the direction I thought was correct! One charge in particular was
levelled at the time. We were being used to make the leadership look
respectable, but our advice would in practice be ignored. A couple of
weeks ago Labour adopted
a fiscal rule which is based on my own work
with Jonathan Portes, and in particular by a presentation I made to
the group. Mariana Mazzucato’s own work
has also featured strongly in Labour party speeches, with good
reason.

At the end of the day, policy makers need to look at evidence. If
they do not we need strong mechanisms that allow them to be
confronted by this evidence. Policy makers that make space for
evidence and take decisions based on it need to be congratulated for
this, rather than being told their efforts were just a smokescreen.
They should be congratulated because letting evidence in often
involves a risk: not just to the policy maker’s priors or
preferences but also for scrutiny of past actions. Equally we should
regard policymakers who knowingly ignore evidence with great
suspicion, and those that try to deliberately keep evidence out of
the public domain should be condemned.

Wednesday, 23 March 2016

I have written at great length about the myth that the Labour government created the need for austerity, or as George Osborne likes to put it, how he has had to clear up the mess that Labour created. Here he is again, in an exchange with Yvette Cooper yesterday. And I long for the day that after he, or any other Conservative, repeats this line, someone has the courage to reply: “that is total bollocks”. This bit of oral [1] history has survived for too long.

I will not go again through all the details (for that see these two posts), because a simple picture tells you all you need to know. Here is the UK government deficit, as a percentage of GDP, since 1970.

The deficit in the five years before the global financial crisis was around the average over this whole period. It shoots up in 2008/9 and 2009/10 for one simple reason: the UK, like most other countries, experienced the largest recession since WWII. Osborne has been clearing up the mess left by a major recession, which left UK GDP around 15% below its pre-recession trend. And the real irony is that he has done nothing to fix that very real problem, but instead obsesses about one of its symptoms.

Yet as long as this myth continues to go unchallenged, Osborne can portray Labour as unfit to run the national finances. As long as it goes unchallenged, a large section of voters will continue to believe that austerity was Labour’s fault. I think most people now agree that Labour made a huge tactical mistake when they failed to combat this narrative five years ago. But as this little exchange from yesterday shows, the damage to Labour the myth has done is not going to go away because the Conservatives will not stop repeating the myth.

I therefore have a suggestion. John McDonnell should send a copy of this chart to every Labour MP and tell them to always keep a copy with them. The next time the ‘clearing up the mess they left’ line is repeated, they should respond not by changing the subject or looking sheepish. They should produce the chart and say that it is just not true. The deficit went up because of the recession following a global financial crisis, and this chart proves it. [2]

[1] I know I'm abusing the meaning of 'oral history' here, but I do so because the written history is very different. The few scholarly papers on fiscal policy under the Labour government are consistent with the data and facts.

[2] I am also happy to suggest simple knock downs to possible responses. For example:

C: The recession was caused by inadequate financial regulation during Labour’s watch.

C: IMF/OECD data show huge cyclically adjusted deficits in the pre-recession years

L: Extremely dubious (the OBR who use real data to cyclically adjust do not have this, and few signs of a huge boom at the time), and pure hindsight (both groups suggested otherwise at the time).

C: Everyone knows Gordon Brown bent the rules and missed his targets

L: George Osborne has missed 3 of his own targets. Of course policy was not perfect under Labour, but that does not change the fact that the deficit more than tripled in size between 2007 and 2009, and that was all down to the recession.C: Labour did nothing to tackle the deficit in their last two years in office, when George Osborne was saying they should.L: You are right, and we make no apology for it. In 2009 the UK, along with the US, Germany and China, undertook a fiscal stimulus, which George Osborne argued against. Every serious economist agrees that helped prevent the recession being even worse than it was. Which means if Osborne had been Chancellor in 2009, UK unemployment would have risen by more and real wages would have fallen even more.

Tuesday, 22 March 2016

There were a lot of interesting and useful comments on my last post
on MMT, plus helpful (for me) follow-up conversations. Many thanks to
everyone concerned for taking the time. Before I say anything more
let me make it clear where I am coming from. I’m on the same page
as far as policy’s current obsession with debt is concerned. Where
I seem to differ from some who comment on my blog, people who say
they are following MMT, is whether you need to be concerned about
debt when monetary policy is not constrained by the Zero Lower Bound.
I say yes, they say no, but for reasons I could not easily
understand.

This was the point of the ‘nothing new’ comment. It was not meant
to be a put down. It was meant to suggest that a mainstream economist
like myself could come to some of the same conclusions as MMT
writers, and more to the point, just because I was a mainstream
economist does not mean I misunderstood how government financing
works. It was because I was getting comments from MMT followers that
seemed nonsensical to me, but which should not have been nonsensical
because the basics of MMT are understandable using mainstream theory.

One comment on that earlier post provided a link to a very useful
Nick Rowe post,
who as ever has been there before me. This suggested that MMT assumed
a vertical IS curve (there is no impact of interest rates on
aggregate demand). If the IS curve is vertical, then it explains the
puzzle I have. In the thought experiment I outlined in my previous
post, if the government started swapping debt for money the decline
in interest rates that would follow [1] would have no impact on
demand, so there would be no rise in inflation. Indeed what else
could it be besides an assumption of a vertical IS curve, as MMT does
not deny that excess demand would lead to inflation at full
employment.

I now think that is putting it too strongly. The view that many MMT
writers have
is that interest rates have an unreliable impact on demand
relative to fiscal instruments. In that case of course you would have
to use fiscal policy to control demand and inflation. That would be
the focus of the fiscal rule. It is a similar regime to one I suggest
would be appropriate for individual Eurozone countries. Inflation
would be a discipline on deficit bias. [2]

What about a world where monetary policy did successfully control
demand and inflation, which is the world I’m writing about?
Evidence suggests you then need a fiscal rule stopping deficit bias
(a gradual rise in the debt to GDP ratio over successive cycles). In
a country with its own central bank (so no concern about forced
default) and where all debt is owned domestically, the standard
reasons why you would be concerned about deficit bias are
intergenerational equity, crowding out of capital, and having to
raise distortionary taxes to pay the higher debt interest bill.

There is a lot you can say on all three, but the point I want to make
is simple. Being in that world means you do not need to worry about
other sector balances because of their impact on demand. By
being in that world at no point am I misunderstanding how government
financing works, or ignoring the role of money. It does not mean I read
the government budget constraint from left to right or vice versa!
Yet I still get comments like this one
left on a more recent post.

“Your political yourself Simon. One thing more than anything really
annoys me. Why do you never announce or go public and say that taxes
do not fund government spending?”

Comments like the one above, taken without context from some MMT
paper, just appear stupid. By all means criticise my view that
monetary policy is effective, or that rising debt has costs, but in
future comments like that will just be ignored.

Let me make the same point using another example. Alex Douglas in a
post
argues that MMT does make an original contribution to political
economy. He looks at a Warren Mosler claim that the state creates
unemployment, and this is the only reason unemployment exists. It
seems to me (with some additional help from Alex) that this involves
two elements. The first sounds like a combination of points that
mainstream economists might make: deficient demand exists because we
are in a monetary economy, and some combination of monetary and
fiscal policy can always get rid of deficient demand. The second is
that money exists because the state requires taxes to be paid with
it. Now I’m less sure about that second argument, but the point is
that I can unpick what I agree with and what I do not using perfectly
standard economic ideas. Yet if he had simply sent me a comment which
said “the state currency is fundamentally a device for coercing
labour” I wouldn’t have had a clue what he was talking about.

Now you might ask at this point why is it so important to be able to
put MMT arguments in the language of standard macro. MMT is a
coherent school of thought, using a language that those who have read
the important texts understand. [3] Someone like me should just take the
time out to read those texts. Well I have read some MMT papers, but I
can assure you I have read many more than pretty well every
mainstream macroeconomist I know. So what you may say. But it is a
fact, and you may think it is an unfortunate fact, that mainstream
macroeconomics is pretty dominant in both academic and policy
circles. And it will stay that way: heterodox economists have been
predicting the downfall of mainstream economics for longer than I
have been an economist. [4] So if MMT is to have any influence, it
will be through changing how mainstream macroeconomists think.

You gain that influence by properly understanding the mainstream.
Bill Mitchell, writing in 2013, lambasts
economists like me who try to suggest that the fixation with debt
since 2010 does not come from mainstream macro. He does not believe
it, and writes

“Why is there mass unemployment if government officials understood
all our claims? It would be the ultimate example of venal
dysfunctional politics to hold that that everybody knows all this
stuff but are deliberately disregarding it – for what?”

But that is the tragedy of what has happened since 2010. Politicians,
either out of panic or with ulterior motives, decided in countries
with their own currencies that we should start worrying about the
market no longer buying government debt, and austerity was the
result. In this they were supported by a media that thought the
government was like a household, and economists from the financial
sector who had their own reasons for promulgating this myth. True,
they did find support from some mainstream academic macroeconomists,
but that support was never based on mainstream theory.

What mainstream theory says is that some combination of monetary and
fiscal policy can always end a recession caused by demand deficiency.
Full stop: no ifs or buts. That is why we had fiscal expansion in
2009 in the US, UK, Germany, China and elsewhere. The contribution of
some influential mainstream economists to this switch from fiscal
stimulus to austerity in 2010 was minor at most, and to imagine
otherwise does nobody any favours. The fact that policymakers went
against basic macro theory tells
us important things about the transmission mechanism of economic
knowledge, which all economists have to address.

[1] Bill Mitchell appears to suggest
that in this case the central bank could maintain its interest rate
by selling its stock of government debt. However pretty soon it would
run out of assets to sell. This is exactly why some central bankers
are reluctant to undertake helicopter money. One solution with
helicopter money is to get the government to recapitalise the central
bank, but of course to do that would involve creating more government
debt. The central bank could start creating its own debt, but if governments stopped creating their own debt and asked the central bank to do it for them, nothing has really changed.

[2] It is not clear
to me that in such a world debt would always be tied down. A
government that used an effective (in multiplier terms) fiscal
instrument in booms (e.g. government spending) but an ineffective one
in depressions (tax breaks for the wealthy) might experience an
upward drift in debt. But what is clear is that in such a regime,
concern about the debt stock should never justify significant
departures from demand and inflation stabilisation.

[3] Although, as the range of comments to my earlier posts showed, what people understand MMT to mean varies quite a lot.

[4] I personally
would not welcome the disintegration of macro back into separate
schools of thought. Economists should be like doctors, and I do not
want to have to ask my doctor what medical school of thought they
belong to. I have relied on doctors using the same language and being
able to understand each other. However I also realise that the unwise
fixation of the current mainstream with microfoundations methodology
can act as an exclusion mechanism, which encourages the formation of
alternative schools of thought. This is yet another reason to be very
critical
of this methodological hegemony.

Monday, 21 March 2016

One of the problems with fixed date deficit (or in this case surplus)
targets is that they encourage playing around with the public
finances to hit the target. Generally, but not always, this involves
making a saving today by shifting costs into the future.
Privatisation is an obvious example. It may be justified if the net
present value of the sale is positive, or if privatisation really
improves efficiency, but all to often it is a device to meet a short
term target.

As Jolyon Maugham shows
clearly, Osborne has done his fair share of such tricks, and not just
in the latest budget. I have nothing to add, except a thought on
where this should take us. There are two roads not to take. The
first, which is taken by many on the right, is to say that the
Chancellor should have imposed more ‘real’ cuts to meet those
targets. The second is to suggest that really the Chancellor is doing
sensible macro after all, but is just trying to disguise the fact.

What accounting tricks show is that the target itself is nonsense,
and not that the Chancellor should try harder to hit them. While these tricks should clearly be exposed, there is a
danger that by focusing too much on them, we inadvertently
legitimise the target they are designed to achieve. What they show is how difficult the Chancellor now
finds it to cut public spending any further. I do wonder sometimes at
the mindset of those
who write that Osborne has failed because he did not cut enough to
meet his targets. Have they internalised the anti-Keynesian
propaganda so much that they actually believe it?

For the same reason, these accounting tricks do not show that Osborne
is relaxing austerity in the way I and others have argued should
happen. The planned decline in public investment is real enough. There were plenty of cuts in the budget, and while disability
cuts as proposed have now gone (is this a record for the speed of
reversal of a budget measure), they may simply return repackaged. The
savage cuts to ‘unprotected’ department spending remain, as does the myth of protection itself. The
Chancellor used tricks not because he had a change of heart, but
because he ran out of options. Nor do cuts in capital gains tax or
higher rate tax bands make for much of a fiscal stimulus, as they
fall on groups who will tend to save much of it.

The Chancellor is
culpable for sure. But his mistake was not to use accounting tricks,
but in putting at the centre of his budget strategy a politically
inspired target which makes no economic sense whatsoever.

Saturday, 19 March 2016

In 2007 the Pitt review told
us that climate change was going to greatly increase the incidence of
record breaking bursts of rainfall in the UK. The Labour government
responded by substantially increasing their spending on flood
defences in the spending review which ended in 2010/11.

The coalition government reversed
those increases, leading to sharp falls in spending on flood
prevention. Five years and many costly floods later, George Osborne
has finally admitted he was wrong by announcing a substantial
increase in money for flood defences. After being told by the
government, one flood disaster after another, that they were doing
everything that was possible, they have now decided
that maybe it would be a good idea to spend more.

A bigger mea culpa you could not find. Yet if you google “austerity
flooding”, it is still my blog post that comes top. When the floods
hit around Christmas in 2013, no one seemed to want to connect the
two. The government seemed
immune to criticism, and successfully directed any culpability to the
Environment Agency (who could not answer back). Even with the latest
floods, outside the pages of the Guardian or Independent there was
little criticism of earlier spending decisions. Yes Labour were slow
out of the blocks in attacking the government, but are we really in a
media world where if a senior politician does not talk about
something it becomes a non-subject?

Chris Dillow asks
why Osborne is not given the scorn and derision he deserves. As ever
he gives many possible answers, but to many people one factor above
all explains what is going on. It can be summarised by the following
chart from the IFS, looking at who wins and who loses from this
latest budget.

As I noted in my last post,
Osborne felt he had to produce a budget like this for reasons that
have only to do with who will be the next leader of the Conservative
Party. Yet many will conclude that he (almost) gets away with it
because it is in the interests of those who control the media to let
him get away with it.

While there is undoubtedly some truth in this, I do not think this is
quite the killer explanation that some suppose. Another important
factor is that we have been living through a period in which the need
to cut spending to reduce the deficit has entered the national
consciousness as not only an undeniable truth, but an imperative that
dominated all other concerns. So strong was that conviction that it
helped win the Conservatives an election, despite the fact that they
pledged to make the deficit worse by cutting taxes. Osborne had
successfully characterised himself as the politician brave enough to
‘make the hard choices’ required to fulfil that imperative.

But as I have argued before, this belief that what George did and
continues to do on cuts is an undeniable necessity is a product of
the events of the recent past, rather than some immutable idea that
the nation will forever hold. The most significant part of Iain
Duncan Smith’s resignation letter
is the following:

“I am unable to watch passively whilst certain policies are enacted
in order to meet the fiscal self-imposed restraints that I believe
are more and more perceived as distinctly political rather than in
the national economic interest.”

So a plea to political journalists and commentators. Forget the spin
that this resignation is all about the EU referendum (which, like all
good spin, has an element of truth) and focus on this sentence. The
idea that with his cuts George was and is only doing what had and has to be
done is crumbling, and you do not want to be the last to notice.
Start holding our government to account, not just for benefits cuts
but also for the damage caused by flooding, and above all for the
dire performance of the UK economy relative to the past.